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Simple English definitions for legal terms
Section 1244 Stock
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A quick definition of Section 1244 Stock:
Section 1244 stock is a special type of stock that allows people who own shares in a small business to get a tax break if they lose money when they sell their stock. Normally, when you sell stock and lose money, you can only deduct a little bit of that loss from your taxes. But with Section 1244 stock, you can deduct up to $50,000 (or $100,000 if you're married) of your losses as an ordinary loss, which means you can deduct the whole amount from your taxes right away. To qualify for this special treatment, the small business can't have raised more than $1,000,000 from selling stock, and the rules are spelled out in the Internal Revenue Code.
A more thorough explanation:
Section 1244 stock is a type of stock transaction that allows shareholders of a small business corporation to treat up to $50,000 of losses (or $100,000 for a married couple filing jointly) from the sale of stock as ordinary losses instead of capital losses. This means that if the stock decreases significantly in value resulting in a loss, the owners of that stock may be able to deduct that loss as an ordinary loss.
A small business corporation is defined as a corporation that has received no more than $1,000,000 in money and other property for stock. This provision is found in the Internal Revenue Code at 26 U.S.C. § 1244.
Normally, when someone sells stock, it is treated as either a short-term or long-term capital gain or loss. However, Section 1244 allows shareholders of a small business corporation who sold stock at a loss to avoid the limitations on deductions and deduct the entire loss from their sale as an ordinary loss immediately in the year of realization.
John owns stock in a small business corporation that he bought for $10,000. A few years later, he sells the stock for $2,000, resulting in a loss of $8,000. Normally, this would be considered a capital loss and John would only be able to deduct $3,000 of the loss from his taxes. However, because the stock is Section 1244 stock, John can deduct the entire $8,000 loss as an ordinary loss on his taxes.
Another example would be if a married couple owns Section 1244 stock in a small business corporation that they bought for $20,000. They sell the stock for $5,000, resulting in a loss of $15,000. Because they are filing jointly, they can deduct the entire $15,000 loss as an ordinary loss on their taxes.
These examples illustrate how Section 1244 stock allows shareholders of a small business corporation to deduct losses from the sale of stock as ordinary losses instead of capital losses, which can result in a larger tax deduction.